Cartilage contains an extensive extracellular matrix and provides mechanical strength to help resist compression in joints. Cartilage also serves as the template for growth and development of most bones. Extracellular matix molecules such as perlecan, link protein, aggrecan, and type II collagen are expressed during chondrocyte differentiation. Mutations of these genes and regulatory factors result in impaired cartilage formation and malformation of the limbs, craniofacial bones, and appendicular skeleton. Cartilage formation is initiated by mesenchymal cell condensation to form primordial cartilage. This is followed by chondrocyte differentiation, which includes resting, proliferative, prehypertrophic, and hypertrophic chondrocytes. As the final step in endochondral bone formation, hypertrophic cartilage is invaded by blood vessels and osteoblasts, and the calcified cartilage is subsequently replaced by bone. Thus, spatial and temporal regulation of chondrocyte differentiation is essential in determining the length and width of skeletal components. We found that pannexin 3 (Panx3) is highly expressed in developing cartilage and bone. Panx3 is a new member of the pannexin gap junction family of proteins, and was originally identified through a GenBank database search. In vertebrates, gap junction proteins comprise more than 20 members of the connexin superfamily and 3 members of the pannexin family. Gap junctions regulate cell morphology and physiology and are implicated in cell proliferation and differentiation. Gap junctions exert their actions by allowing the exchange of small molecules such as ions, as well as low molecular weight metabolites and other messenger molecules, between adjacent cells (via gap junctions) and between cells and extracellular space (via hemichannels). Many of the growth factors and transcription factors involved in cartilage development have been identified. However, the regulatory mechanisms that control the switch from proliferation to differentiation, or that maintain the differentiated state, are still unclear. Parathyroid hormone (PTH) and related protein (PTHrP) are essential for chondrocyte proliferation. However, we still do not know how cell proliferation signals turn off and how a commitment to differentiation is made. We found that Panx3 mRNA was strongly expressed in the prehypertrophic zone in the growth plate, where chondrocytes stop proliferating and differentiate into hypertrophic chondrocytes. Panx3 was induced during differentiation of the chondrogenic cell line ATDC5. Overexpression of Panx3 promoted ATDC4 cell differentiation, while suppression of endogenous Panx3 expression by shRNA inhibited differentiation. We found that Panx3 inhibited PTH-mediated ATDC5 cell proliferation. In addition, Panx3 promoted release of ATP from ATDC5 cells into the extracellular space via its hemichannel activity. We also found that Panx3 expression reduced both intracellular cAMP levels and the activation of CREB, a PKA downstream effector that activates the genes necessary for proliferation. Our results suggest that Panx3 functions to switch chondrocyte cell fate from proliferation to differentiation by regulating intracellular ATP/cAMP levels, which in turn counteracts the PTH/PTHrP signal pathway. Panx3 is expressed in the perichondrium of developing growth plates, which contains osteoprogenitor cells. We found that Panx3 expression was induced during differentiation of preosteoblast C2C12 cells. Overexpression and inhibition studies revealed that Panx3 inhibited C2C12 cell proliferation and promoted its differentiation. Panx3 hemichannel activity was required for the inhibition of proliferation via the PKA/cAMP/CREB pathways. We identified that Panx3 functions as a unique Ca2+ channel in the endoplasmic reticulum (ER). This ER Ca2+ channel was activated through ATP and its cell surface receptors, whose downstream intracellular signal pathways were different from those involved in the activation of IP3 ER Ca2+ channels. We found that Panx3 ER Ca2+ channels were essential for the promotion of C2C12 differentiation. Our findings uncovered Panx3 as a new regulator involved in the process of switching from cell proliferation to differentiation. Osteoblasts differentiate from mesenchymal stem cells and form bone through endochondral and intramembranous ossification. Growth factors such as BMP2 induce the master osteogenic transcription factors Runx2 and osterix. This leads to the activation of osteogenic marker genes, and subsequently to terminal differentiation of osteoblasts and mineralization. Ca2+ is a universal intracellular signaling molecule that regulates cell proliferation, differentiation, morphology, and function. Intracellular Ca2+ concentration (Ca2+i) can rise more than 5-fold via Ca2+ influx from the extracellular space and/or release from the endoplasmic reticulum (ER), an intracellular Ca2+ storage organelle. This occurs when cells are activated by extracellular stimuli such as ATP. We found that Panx3 functions as a unique ER Ca2+ channel, hemichannel, and gap junction. Our data suggest that all three Panx3 activities are intimately associated and involved in osteoblast differentiation. The hemichannel activation is likely a first step. ATP released from the cytosol through the hemichannel binds to ATP receptors that promote signaling, which include Akt and IP3, and this subsequently activates the Panx3 ER channel and increases intracellular Ca2+ levels. This increase activates calmodulin (CaM) signaling, which increases the transcription level and amount of active NFATc1 protein, which promotes the expression of osteogenic marker genes. In addition, the activation of Akt also promotes the degradation of p53, an osteogenic inhibitor, independently of the Akt-ER Ca2+ channel-CaM pathway, and this enhances differentiation. The increased Ca2+i level originated in cells by the hemichannel propagates as a wave into surrounding cells through the Panx3 gap junction, and subsequently promotes Ca2+ signaling among cell populations for differentiation.